Resource Commodities

Prophecy Development (TSX: PCY) CEO John Lee on the Robust PEA for the Gibellini Project, the Most Important Vanadium Project in North America

May 31, 2018

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Gerardo Del Real: This is Gerardo Del Real with Resource Stock Digest. Joining me today is the Executive Chairman of Prophecy Development (TSX: PCY)(OTC: PRPCF), Mr. John Lee. John, how are you today?

John Lee: I'm doing fine, sir. Good morning.

Gerardo Del Real: Good morning, John. Listen, it's been a couple of months since you and I chatted and it's been a very busy couple of months. Let's start with the most recent news. You just announced a very positive PEA for the Gibellini vanadium project. The numbers, we can go in detail, the internal rate of return is 50.8%. The net present value, and this is all after tax mind you, $338.3 million using a 7% discount rate. A payback period of 1.72 years. Congratulations, John.

John Lee: Oh, thank you very much. Yes, this has been busy really since we acquired the project, Gerardo, as you've been following the project closely.

Gerardo Del Real: Let's backtrack a bit and provide a little bit of context for people that are new to the story because I just read the numbers and you still have a market cap of approximately $22 million Canadian. You're attempting to become the first primary vanadium mine in North America. You also, prior to this PEA earlier in the month, summited a plan of operations for the project. Everything there looks on schedule. How are things coming along?

John Lee: Well, Gerardo, sounds like you know the project better than I do now. I think first of all, the announcement of this preliminary economic assessment really put the project in firm footing and established the project as undoubtedly the most important vanadium project in all of North America, both in terms of time to market and economic viability. You're looking at a project situated in Nevada, best jurisdiction for mining and investing in all of North America. With a capital expenditure of just about $100 million, yet the project generates over $300 million in net present value. At a very, very reasonable 7% discount, especially considering it’s in a politically safe, stable jurisdiction, Gerardo.

So it's combination of very high net present value, very high internal rate of return with less than payback 1.72 years, and together with a very manageable capital expenditure. We all here believe this is going to be a mine within 3 years, Gerardo.

Gerardo Del Real: I'm glad that you touched on it being a mine within the next three years, because the other important point to note is that the life of mine is projected to be at least 13 and a half years. So this isn't a project that has a high internal rate of return, but is only good for four or five years, there's definitely scale here. And then the second point I'd love for you to comment on is the sensitivity analysis. You've used pretty conservative parameters on the vanadium price.

Can we talk about the plan moving forward to make this a mine? And then let’s talk about that sensitivity analysis because you're definitely leveraged to a rising price in vanadium. I'd love your take on that, John. You're one of the foremost experts on it.

John Lee: Yes. Well, Gerardo, this PEA is called preliminary economic assessment, but it's over 249 pages once it'll be filed with SEDAR next week. And the details of this PEA highlights are available on Prophecy's website, prophecydev.com. And if you'd allow me to just quickly to go through the numbers, you've touched on a number of points. You're looking at an after tax internal rate of return of over 50%, and net present value at 7% discount over $340 million dollar, a payback period of less than 1.72 years.

And, Gerardo, you're looking at an annual production of vanadium 9.65 million pounds. It is significant. It would account for 15% of the ex-China-Russia-South-Africa production. So outside those three jurisdictions, it will account for 15% of the R.O.W., the rest of the world. Including those three countries, it will constitute about 3.5% of the global production.

We made the assumption, as you mentioned, of a very conservative vanadium price of $12.70, even though vanadium prices are 10% higher than that, at $14. The operating cost is $4.70 per pound of vanadium pentoxide, which is about 30% of the current vanadium price. What that means, Gerardo, is that the project is probably the lowest quartile operating costs in the vanadium sector. What that means, we can withstand competitions and we can stand the volatile nature of the metal commodity prices. When the mining is closer to production, even if the vanadium price were to go down 70%, which is inconceivable in our opinion, we can talk about later, towards the end of my vanadium forecast, that the project is still manageable to be on a break even basis. At a breakeven price, that includes capital costs and all in, the breakeven is $7, just over $7 dollar vanadium, which is 50% of the current vanadium price.

So you know, Gerardo, I've been around the mining industry for almost two decades. Time goes by fast. I've never seen a project with such robust economics in a top jurisdiction in Nevada. It's top jurisdiction, just exceptional project, not just for vanadium, for any project in general. Period. It deploys very sort of bread and butter, truck and shovel, open pit mining operation with a strip ratio, Gerardo, of less than 0.221. Literally the entire hill's mineralized, there's no waste to remove. And the processing method is through a conventional direct heap leach process, at atmospheric pressure and ambient room temperature without any beneficiation process. What I mean by that, we don't need to gravitate, separate, or magnetic separate. There's no high pressured container leaching, and there's no applications of high temperature either. So you're looking really at the very basic lowest cost in terms of processing.

The 13.5 year mine life, Gerardo, is only the tip of the iceberg. There are several targets within 30 square kilometers of land of which we control 100%, that has shown very strong surface expressions, but have yet to be drilled. So we believe that is easily the most important vanadium mine because as you mentioned earlier that in North America because we already submitted the plan of operation. We're 70% of the way in terms of permitting and that the PEA demonstrated exceptional economics. So combined with accelerated permitting, time to market, and the project economics makes this project undoubtedly the most important project in North America.

Gerardo Del Real: And again, just to remind everybody, you still have a market cap of approximately $22 million Canadian, which is astonishing to me. What are the next steps, John?

John Lee: Yeah, just a couple of quick things. The sensitivity studies, as that I mentioned the project’s IRR go down from 50% to 20% at a vanadium price of half where we are today. So the project really in our view is destined to be an operating entity within three years. We couldn't be more pleased with the numbers.

However, there are a couple of things we could optimize. For example, we used Capex of 25% contingency, which we think is very conservative. If we're to lower the Capex by 10% and then use the current vanadium price of $14 and selectively go after the higher grade starter pit first, with a 10% higher vanadium grade than what's currently used in the model, Gerardo, it's a plausible scenario that the IRR could approach triple digits. So what that means is we are looking at a 12 months payback. Which is really quite unheard of in my as I mention 18 year of doing business.

You mentioned about market cap at $20 million. I just want to share with you the landscape of the current vanadium mining sector. There is only one vanadium producer listed in the North American stock exchange, the company's name is Largo, I might have mentioned it before. But certainly in one of my articles on seeking alpha I talked about it before and I recommend owning the stock and I was a shareholder. Largo in 2017 was in the red because vanadium price was $4 to $10 range. In early 2017 was on the verge of bankruptcy where it carries more debt than equity. Had $300 million in debt. In the first quarter in 2018, Gerardo, Largo made $63 million from the mine operating in Brazil. $63 million in one quarter. The market cap, the enterprise value of the company went from $200 million, now is trading at $1.2 billion.

Now, if you look at the production of Largo, which is 20 million pounds a year, and measure that against the proposed forecasted production Gibellini which is just under 10 million pounds. So you're looking at us as a mini Largo. One can plausibly make the case that if Gibellini were to be in production today, we are looking at enterprise value, should be half of Largo, $600 million. This is a situation, Gerardo, where you're looking at the ripple effect. Every time when you have a bull market in the mining space, with a surge in the underlying commodity price, a metal price, you're going to see the benefit of that money coming into producer first. Because people understand dividend, understand cash flow. So as these company's price stabilize, as Largo sort of plateau in whatever the valuation that is, you're going to see that money trickle down to the developers, and eventually to the junior.

So therefore, we believe that there are only two stories that are legitimate. One is Largo, and the other one is Prophecy. I think it's only a matter of time, I really do, that the insiders start buying this stock. Largo has more than tripled, quadrupled since we first talked six months ago and Prophecy's only beginning to move. So I think it's only a matter of time. You're looking at a big valuation, from $20 million market cap to $600 million which is what we believe we will be three years from now, once we go into production.

Gerardo Del Real: What do you forecast, John, in regards to vanadium in the next three years? What do you see? You're an expert in the field, share your thoughts there.

John Lee: Typically, Gerardo, for nowadays, for a mine, from permitting, from receipt of the permit and the capital to building a vanadium mine, into operation, it takes about three to five years, minimum five years. So therefore we don't anticipate any new vanadium supply coming on street. And China is practicing supply side economics and placed a lot of environmental restrictions in the expansion of vanadium and steel production. So therefore we don't see any new supply coming on stream regardless of vanadium price. It's just not going to stimulate new supply coming on stream. The time to market is a three to five year window. We see Gibellini is the only project we are aware of that's capable of meeting this additional demand within the 36 month window.

If you look at the demand side you have the rebar industry which is traditional steel reinforcement bars, China just upgraded vanadium testing in order to make their building more rigid. That's not going to go away. If you look at the aerospace industry, more people are flying, and vanadium is required for every single engine that General Electric and Boeing makes for the airplane. So that's not going to go away.

And if you look at third, the vastly growing, rapidly growing market sector for vanadium is the redox battery to compliment renewable energy, so we talked about it. There's a 7-fold increase in renewable power generation in the last decade, that's not going to go away. So therefore vanadium is what we call a new age metal, or as Robert Friedland, the legendary billionaire mining investor, called it a miracle metal. We see demand coming from all dimensions, vanadium growing from double, single digit for the next decade, if not more.

You have a billion people moving into urban centers in the next 13 years. Where are they going to live, Gerardo? You're going to see buildings grow taller and an equivalent of 100 times size of New York cities they got to build. So we see across the board an increase in vanadium, yet the supply, forecast by Bank of Montreal and a lot of other reputable vanadium authorities, just not myself, who are seeing a flattened supply of vanadium, coupled with the surging demand of vanadium across from traditional to high tech, which creates a perfect storm. I cannot think of a lower risk entry point for development stage projects given that we already have a very, very clear benchmark of a producer that's in the billion dollar market cap range, Gerardo.

Gerardo Del Real: Impressive, impressive. I think that's the only word to use. I mean the numbers are impressive. The jurisdiction, obviously, in Nevada is absolutely phenomenal. And we know geopolitically how important it's becoming to be in safe jurisdictions and again I can't think of a better place than Nevada to develop this mine. John, it's been insightful as always, is there anything else you'd like to add?

John Lee: Gerardo, there's a next step. So does it take to the finish line? The company now in the last six months has achieved many significant milestones. We assembled an all-star team with experts from Barrick, with 40-years experience in permitting mines and commissioning mines into production. We've consolidated the 28 square-kilometers of land which is enough for further explorations and processing and mining, and heap leaching, and waste dumps. We've had a partner with a Chinese company which is the authority on vanadium processing and have been processing vanadium through environmental friendly hydrological process in the last ten years.

So in terms of next step, we submitted our permit, within 60 days we're going to hear some feedback. And then after that, working through the questions and answers, and we're going to go toward the last step which is Environmental Impact Statement. We expect to file EIS in 2019, of which the government is being mandated by Donald Trump to render a decision within 12 months. So our projected timeline is to have all permitting done by the end of 2020, and at that time of production construction a decision would be issued. And the construction would take about 12 months.

So in parallel to this permitting process, we're going at engineering, procurement, construction management, which in simple terms, Gerardo, we're issuing tender contract, right? Who's going to build this contract for us? How long's it going to take? And how much is it going to cost? So it's going to be a turnkey construction contract of which we are writing the specifications right now and it's going to go out by the end of the year. And we believe we're going to have a turnkey contract on hand by the end of 2019. At the end of 2019, early 2020, we'll hopefully have the permit, and we're going to have the contract on hand, and we're going to start construction. And then see the vanadium coming out at Gibellini by the end of 2021.

Gerardo Del Real: Well I know that behind the scenes you're getting a lot of interest on the financing side and hopefully I can have you back on, John, as that develops.

John Lee: Well, you know what, Gerardo, we are seeing a lot of expressions of interest from strategic investors. So we don't have any issue with financing. I think as the market cap appreciates we're going to raise along the way. So we're not going to dilute ourselves 100% or raise $100 million tomorrow, but it seems to me there is plenty of money available and that's tracking this project very closely. I was just recommending to retail investors here to go grab some shares in the market, because they're limited opportunity for them to participate in private placements which are reserved for institutional investors.